Mumbai: Sales at the country’s second-largest car maker,Hyundai Motor India Ltd, fell and that at larger rival, Maruti Udyog Ltd, slowed in March compared with a year ago, signalling consumers may be rolling back spending as rising interest rates makes it more expensive to buy cars.
The country’s central bank, in a bid to tame a two-year high inflation, has been increasing the reserve requirements for banks, which creates less money they can give out, and consequently increases the cost of borrowing. Its overnight lending rate is now at 7.75%, a four-year high. That’s the rate at which banks borrow from the central bank.
Car makers are gearing for a likely slowdown. Sales growth this year “will not be the same as last year,’’ said Maruti managing director Jagdish Khattar. “There will be an impact” from the rising rates, “but by how much we don’t know.”
Hyundai said sales fell 14.3% to 19,300 units. The company had sold 22,524 vehicles a year ago. Maruti sold a record number of cars in March, but growth slipped to 5.6% compared with a 20.65% increase in the year-ago month, and 14% in March 2005. Maruti noted that last year’s March was exceptional because consumers rushed to buy cars after a government tax break announced at the end of February that year.
Brokerage firms as well as financiers have already pared their expectations for the industry for this year, led by concern that rising rates and inflation will act as a double whammy and crimp spending power.
“We are expecting the growth for the passenger car segment to come down to 12% this financial from roughly 24% in the financial year ending March 2007,” said N.R. Narayanan, business head for car and commercial vehicle loans at ICICI Bank Ltd.
Every seven of 10 cars sold in the country are financed by bankers. The net interest rates for car loans have climbed to as high as 14% from 10.5% a quarter ago. This translates into a Rs156 increase in the equated monthly instalment (EMI) for a loan of Rs1 lakh taken for three years. The cheapest car in the country, M800, costs about Rs2 lakh.
“It doesn’t make sense to take a big loan at such rates,” says Vishwanath Nayak, a banking executive who has postponed the purchase of his first car, for which he was willing to spend Rs4 lakh. “The amount you pay as loan would likely exceed 25% of the car’s value and it might be better to buy with full cash payment.”
Meanwhile, many expect interest rates to only go north for a while. “We are expecting 50 to 75 basis point of further increase in the interest rate under RBI’s measure to curb inflation,” said Avinash Gorakhshakar, head of research, Emkay Research. “So the demand will slow down for couple of months till inflation is curbed.”
Car makers and financiers are, meanwhile, trying to work out new financing methods to lessen the impact of rising rates. “We will be talking to financiers for increasing the tenure of loans to make the instalment affordable,” said Hyundai vice-president (marketing and sales) Arvind Saxena.
About 1.3 million cars are sold in India each year, making it one of Asia’s top markets for cars.